08 August 2014

Bankruptcies Are Falling! Bankruptcies Are Falling!

No one would blame folks for believing that the lackadaisical recovery from the Great Recession--slow job growth and even slower income growth--would entail a relatively high number of bankruptcy filings. Nonetheless, such folks would be wrong.

As I've explained to students who take my courses in Bankruptcy law, individual filings are a trailing economic indicator. In other words, as the economy improves, consumer credit increases. Why? Because boom times produce irrational exuberance and consumers believe they can borrow more and more because the good times won't end. And, as consumer debt increases, so does the possibility of what quaintly used to be called financial embarrassment. And with such embarrassment comes the utility of personal bankruptcy.

The bottom line: without growth in consumer debt, consumer bankruptcies fall.

And, with the anemic recover has come not an anemic increase in consumer debt but an inflation- (and population-) adjusted decrease. Go here to read a more analytic post by Bob Lawless that further explains this seemingly anomalous state of affairs.

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